Tom Moeller

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/051019c.jpg" width="353">
Housing starts remained firm last month and rose 3.4% m/m to 2.108M units.The prior month&#39;s figure was revised slightly higher and the September gain far outpaced Consensus expectations for a decline to 1.97M starts.
The Census Bureau indicated that the impact of Hurricane Katrina on the figures was minimal.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/051019b.jpg" width="353">
Single-family starts rose 2.6% due to 6.2% gains in both the South (14.0% y/y) and in the Midwest (7.3% y/y). In the Northeast, single family starts rose 0.7% (17.2% y/y) and in the West single family starts fell 5.3% (+11.7% y/y).
Multi family starts rose 7.8% m/m after an upwardly revised 1.5% August gain.
Federal Reserve Board Vice-Chairman Roger W. Ferguson&#39;s speech on the Economic Outlook for the United States can be found <a href="http://www.federalreserve.gov/boarddocs/speeches/2005/20051018/default.htm"> here</a>.

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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@E9/@E901/@E90101/@E90101.HTM">Housing Starts (000s, AR)</a> </th>
<th scope="col">Sept</th>
<th scope="col">Aug</th>
<th scope="col">Y/Y</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
<th scope="col">2002</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Total</td>
<td>2,108</td>
<td>2,038</td>
<td>10.3%</td>
<td>1,950</td>
<td>1,854</td>
<td>1,710</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Single-family</td>
<td>1,747</td>
<td>1,703</td>
<td>12.3%</td>
<td>1,604</td>
<td>1,505</td>
<td>1,363</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Multi-family</td>
<td>361</td>
<td>335</td>
<td>1.1%</td>
<td>345</td>
<td>349</td>
<td>347</td>
</tr>
<tr>
<td class="firstcol">Building Permits</td>
<td>2,189</td>
<td>2,138</td>
<td>7.4%</td>
<td>2,058</td>
<td>1,8 88</td>
<td>1,749</td>
</tr>
</tbody>
</table>
NAHB Housing Market Index Improved 
by <a href="/comment/Moeller.html">Tom Moeller</a> October 19, 2005


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/051019a.jpg" width="353">
Following three consecutive months of decline, the National Association of Home Builders&#39; (NAHB) Composite Housing Market Index gained back in October all of the September drop with a 3.1% increase. Nevertheless the index remained 6.9% below the June peak.
During the last twenty years, year to year changes in the annual composite index had an 85% correlation with the change in single family housing starts.
The m/m increase reflected strong gain throughout the country except in the Northeast.
The October index for sales of single family homes in six months gained back one third of the prior month&#39;s 9.1% drop (-8.9% y/y) while the index for current sales reversed all of a modest September fall (-3.9% y/y).
The NAHB index is a diffusion index based on a survey of builders. Readings above 50 signal that more builders view conditions as good than poor.
Visit the <a href="http://www.nahb.org">National Association of Home Builders</a>.

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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/SURVEYS/@S4/@S4.HTM">Nat&#39;l Association of Home Builders</a> </th>
<th scope="col">Oct</th>
<th scope="col">Sept</th>
<th scope="col">Oct &#39;04</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
<th scope="col">2002</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">Composite Housing Market Index</td>
<td>67</td>
<td>65</td>
<td>69</td>
<td>68</td>
<td>64</td>
<td>61</td>
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</tbody>
</table>
Mortgage Applications Rose Sharply 
by <a href="/comment/Moeller.html">Tom Moeller</a> October 19, 2005


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/051019d.jpg" width="353">
According to the Mortgage Bankers Association, the total number of mortgage applications rose 6.1% last week and reversed most of the declines during the prior three periods although applications so far in October remained 4.2% below the September average.
Purchase applications jumped 7.3% w/w and pulled this month&#39;s level 1.5% below September&#39;s which rose 1.0% from August. During the last ten years there has been a 49% correlation between the y/y change in purchase applications and the change in new plus existing single family home sales.
Applications to refinance reversed nearly all of the prior week&#39;s decline with a 4.5% rise.
The effective interest rate on a conventional 30-year mortgage rose further to 6.35% and is up from 6.03% averaged in September. The low for 30 year financing was 5.71% in late June. The effective rate on a 15-year mortgage rose to 5.95% and increased from the low of 5.33%. The interest rate on 15 and 30 year mortgages are closely correlated (&gt;90%) with the rate on 10 year Treasury securities.
The Mortgage Bankers Association surveys between 20 to 35 of the top lenders in the U.S. housing industry to derive its refinance, purchase and market indexes. The weekly survey accounts for more than 40% of all applications processed each week by mortgage lenders. Visit the Mortgage Bankers Association site <a href="http://www.mbaa.org">here</a>.

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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/SURVEYW/@S5/@S5.HTM">MBA Mortgage Applications (3/16/90=100)</a></th>
<th scope="col">10/14/05</th>
<th scope="col">10/07/05</th>
<th scope="col">Y/Y</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
<th scope="col">2002</th>
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<td class="firstcol">Total Market Index</td>
<td>737.5</td>
<td>694.8</td>
<td>3.9%</td>
<td>735.1</td>
<td>1,067.9</td>
<td>799.7</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Purchase</td>
<td>503.9</td>
<td>469.5</td>
<td>9.2%</td>
<td>454.5</td>
<td>395.1</td>
<td>354.7</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Refinancing</td>
<td>2,095.7</td>
<td>2,004.9</td>
<td>-2.8%</td>
<td>2,366.8</td>
<td>4,981.8</td>
<td>3,388.0</td>
</tr>
</tbody>
</table>
Foreign Buying of Securities in US Markets 3rd Largest in August 
by <a href="/comment/Stone.html">Carol Stone</a> October 19, 2005


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/051019e.jpg" width="353">
Yesterday&#39;s report by the US Treasury of net purchases of securities by foreign investors indicated the third largest monthly amount ever in August, $91.3 billion. This followed two other sizable amounts, $87.5 billion in July and $81.8 billion in June, making a record large three-month total, $260.6 billion, nearly $20 billion more than the prior record cumulative volume in July 2003.
In one sense, the August data are quirky and may not be sustained. The big total resulted from enormous net purchases of foreign bonds in US markets. Although partly offset by sales of foreign equities, the foreign investor activity in &quot;Yankee&quot; bonds and stocks swung to $3.4 billion in net purchases after 17 consecutive months of net sales.The spurt in foreign bond acquisition to $17 billion is far out of line with prior experience, so it will be interesting to see whether it continues or is quickly reversed.Otherwise, transactions in US securities actually moderated a bit in August. They totaled $87.8 billion, down from $101.2 billion in July. Purchases of federal agencies, so-called &quot;GSEs&quot; (government-sponsored enterprises) dropped back, while corporate bond buying picked up and Treasury purchases continue near their 12-month average of $25.3 billion.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/051019f.jpg" width="353">
Among countries, that swing in foreign securities apparently came from UK investors. It&#39;s important to point out here that these Treasury data represent transactions with the first non-US counterparty, regardless of the nationality of the final owner or seller. Since London is a major global financial center, it could well be investors from elsewhere -- perhaps the Middle East -- who moved out of foreign stocks and into bonds that trade in US markets.China&#39;s participation in US markets decreased to $5.7 billion in net purchases in August, but $13.8 billion in July and $14.7 billion in June made the largest two-month period by far; China&#39;s activity is quite erratic, and the let-up in August is actually fairly moderate compared with a sharp saw-tooth pattern that is frequently in evidence. Japan&#39;s net investments, by contrast, have slowed markedly the last several months after a large increase in 2004 and were only $1.2 billion in August.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col></colgroup>
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<th scope="col" class="firstcol">Net Foreign Purchases of Securities in US Markets (Billions US$)</th>
<th scope="col">Aug 2005 </th>
<th scope="col">July 2005 </th>
<th scope="col">June 2005 </th>
<th scope="col">Last 12 Months&#39; Average </th>
Monthly Average
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<tbody>
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<td class="firstcol">2004 </td>
<td>2003</td>
<td>2002</td>
</tr>
<tr>
<td class="firstcol">Total </td>
<td>91.3</td>
<td>87.5</td>
<td>81.8</td>
<td>66.3</td>
<td>63.6</td>
<td>55.3</td>
<td>47.9</td>
</tr>
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<td class="firstcol">Treasuries </td>
<td>28.1</td>
<td>28.5</td>
<td>15.8</td>
<td>25.3</td>
<td>29.3</td>
<td>22.0</td>
<td>10.0</td>
</tr>
<tr>
<td class="firstcol">Federal Agencies (mostly &quot;GSEs&quot;) </td>
<td>15.6</td>
<td>37.8</td>
<td>20.3</td>
<td>19.8</td>
<td>18.9</td>
<td>13.0</td>
<td>16.3</td>
</tr>
<tr class="odd">
<td class="firstcol">US Corporate Bonds </td>
<td>40.3</td>
<td>24.9</td>
<td>54.4</td>
<td>29.6</td>
<td>25.1</td>
<td>22.1</td>
<td>15.2</td>
</tr>
<tr>
<td class="firstcol">US Corporate Stocks </td>
<td>3.8</td>
<td>10.0</td>
<td>4.4</td>
<td>5.1</td>
<td>2.4</td>
<td>2.9</td>
<td>4.2</td>
</tr>
<tr class="odd">
<td class="firstcol">Foreign Bonds </td>
<td>17.0</td>
<td>-5.1</td>
<td>-1.2</td>
<td>-4.3</td>
<td>-5.6</td>
<td>2.7</td>
<td>2.4</td>
</tr>
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<td class="firstcol">Foreign Stocks </td>
<td>-13.5</td>
<td>-8.7</td>
<td>-11.8</td>
<td>-9.4</td>
<td>-7.1</td>
<td>-7.4</td>
<td>-0.1</td>
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Housing starts remained firm last month and rose 3.4% m/m to 2.108M units.The prior month's figure was revised slightly higher and the September gain far outpaced Consensus expectations for a decline to 1.97M starts. The Census Bureau [...]

Housing Starts Firm

Louise Curley

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/051018d.jpg" width="353">
The results of Germany&#39;s latest ZEW survey, released today, were below consensus, showing only a slight improvement in October in the balances between optimists and pessimists among German institutional investors and analysts regarding current economic conditions and those expected six months ahead. The disappointing results of the survey may be due, in part, to the uncertainty arising out of the inconclusive election held last month. A coalition government between the CDU/CSU (Christian Democratic Union, and Christian Social Union), with their narrow victory of four seats, and the SPD (Social Democratic Party) has been agreed upon with Angela Merkel as Chancellor.However, the process of selecting a cabinet, now underway is revealing what may be potentially serious differences among the possible candidates. The process is not expected to be over much before November 17 when the Bundestag formally installs the new Chancellor and pronounces the new government operational. <img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/051018e.jpg" width="353">
Pessimists continue to outweigh optimists in their appraisal of current conditions. The balance between those expecting current conditions to improve and those who expect them to worsen rose a mere one-tenth of one percent from -58.1% to 58.0%. When they look ahead, the respondents to the survey are more optimistic. The balance between those expecting better conditions six months ahead and those expecting worse conditions rose by 0.8% in October to 39.4% from 38.6% in September. The contrast between the respondents&#39; appraisal of current conditions and their appraisal of expectations six months ahead is shown in the first chart.
Inflation is another factor that may be influencing sentiment among institutional investors and analysts.Eurostat published today the Harmonized Consumer Prices Index for the Euro Zone and the individual countries of the area. In addition, indexes of core inflation, defined as the total index excluding, energy, food, alcohol and tobacco, are also published. For Germany, the year to year increase in the total index was 2.61%, up from 1.89% in both August and July. Although core inflation also rose, it remains at low levels, lower than in some of the earlier months of the year. Core inflation was 0.56% in September, compared with 0.46% in August and 055% in July. The Harmonized Consumer Price index and its related Core Inflation index are shown in the second chart.

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<th scope="col" class="firstcol">Percent Balance of Opinion German ZEW Survey</th>
<th scope="col">Oct 05&nbsp;</th>
<th scope="col">Set&nbsp; 05</th>
<th scope="col">Aug 04</th>
<th scope="col">M/M&nbsp; Dif</th>
<th scope="col">Y/Y Dif</th>
<th scope="col">2004 &nbsp;</th>
<th scope="col">2003 &nbsp;</th>
<th scope="col">2002&nbsp;&nbsp;</th>
</tr>
</thead>
<tbody>
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<td class="firstcol">Current Conditions</td>
<td>-58.0</td>
<td>-58.1</td>
<td>-58.9</td>
<td>0.1</td>
<td>0.9</td>
<td>-67.7</td>
<td>-92.6</td>
<td>-83.3</td>
</tr>
<tr>
<td class="firstcol">Expectations 6-months ahead</td>
<td>39.4</td>
<td>38.6</td>
<td>31.3</td>
<td>0.8</td>
<td>8.1</td>
<td>44.6</td>
<td>38.4</td>
<td>45.3</td>
</tr>
<tr class="odd">
<td class="firstcol"></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
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<tr>
<td class="firstcol">German Harmonized Consumer Price Index&nbsp;</td>
<td>Y/Y&nbsp;&nbsp;&nbsp; %&nbsp;</td>
<td>Y/Y&nbsp;&nbsp;&nbsp; %&nbsp;</td>
<td>Y/Y&nbsp;&nbsp;&nbsp; %&nbsp;</td>
<td>Y/Y&nbsp;&nbsp;&nbsp; %&nbsp;</td>
<td>Y/Y&nbsp;&nbsp;&nbsp; %&nbsp;</td>
<td>Y/Y&nbsp;&nbsp;&nbsp; %&nbsp;</td>
<td>Y/Y&nbsp;&nbsp;&nbsp; %&nbsp;</td>
<td>Y/Y&nbsp;&nbsp;&nbsp; %&nbsp;</td>
</tr>
<tr class="odd">
<td class="firstcol"></td>
<td>Sep 05&nbsp;</td>
<td>Aug&nbsp; 05</td>
<td>July 05</td>
<td>Jun 05</td>
<td>May 05&nbsp;</td>
<td>Apr 05</td>
<td>&nbsp;Mar05</td>
<td>&nbsp;Feb 05</td>
</tr>
<tr>
<td class="firstcol">Harmonized CPI total</td>
<td>2.61</td>
<td>1.89</td>
<td>1.89</td>
<td>1.81</td>
<td>1.63</td>
<td>1.45</td>
<td>1.72</td>
<td>1.82</td>
</tr>
<tr class="odd">
<td class="firstcol">Harmonized CPI core</td>
<td>0.56</td>
<td>0.46</td>
<td>0.55&nbsp;</td>
<td>0.46&nbsp;</td>
<td>0.84&nbsp;</td>
<td>0.28&nbsp;</td>
<td>0.74&nbsp;</td>
<td>0.65&nbsp;</td>
</tr>
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The results of Germany's latest ZEW survey, released today, were below consensus, showing only a slight improvement in October in the balances between optimists and pessimists among German institutional investors and analysts [...]

Germany's ZEW Results Are Disappointing: Political Uncertainty and Inflation Causes?

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/051018c.jpg" width="353">
Chain store sales rose for the fourth consecutive week. Last week&#39;s 0.4% increase, according to the International Council of Shopping Centers (ICSC)-UBS survey, lifted sales 1.3% above the mid-September low. 
During the last ten years there has been a 56% correlation between the y/y change in chain store sales and the change in non-auto retail sales less gasoline, as published by the US Census Department. Chain store sales correspond directly with roughly 14% of non-auto retail sales less gasoline.
The leading indicator of chain store sales from ICSC squeaked out a 0.1% (-2.5% y/y) increase.
The ICSC-UBS retail chain-store sales index is constructed using the same-store sales (stores open for one year) reported by 78 stores of seven retailers: Dayton Hudson, Federated, Kmart, May, J.C. Penney, Sears and Wal-Mart.

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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/surveyw/@S2/@S2.HTM">ICSC-UBS (SA, 1977=100)</a></th>
<th scope="col">10/15/05</th>
<th scope="col">10/08/05</th>
<th scope="col">Y/Y</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
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<td class="firstcol">Total Weekly Chain Store Sales</td>
<td>450.6</td>
<td>448.9</td>
<td>3.3%</td>
<td>4.6%</td>
<td>2.9%</td>
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Chain store sales rose for the fourth consecutive week. Last week's 0.4% increase, according to the International Council of Shopping Centers (ICSC)-UBS survey, lifted sales 1.3% above the mid-September low. During the last ten years [...]

Chain Store Sales Rose Again Last Week

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/051018a.jpg" width="353">
The overall Producer Price Index jumped 1.9% last month, easily surpassing Consensus expectations for a 1.1% increase. The gain was the largest since January 1990 and was led by a 7.1% leap in energy prices which also was the strongest since 1990.
The so called &quot;core&quot; PPI index is focused on since it provides an indication of the degree to which pressures on energy or food prices may be &quot;spilling over.&quot; Finished goods prices less food &amp; energy increased 0.3% in September. The rise beat Consensus expectations for a 0.2% increase and followed no change in prices during the previous month.
And these spillover effects may indeed be now more apparent than earlier for several reasons. 1) The y/y change in core prices held at 2.5%, up from 0.1% and 0.2% during 2002 and 2003, respectively. 2) Prices for core consumer goods rose 0.2% and the y/y gain held at 2.6% versus a 0.1% increase in 2003. 3) Capital equipment prices rose 0.3%. The y/y gain rose to 2.3% from -0.4% during 2002 despite a 22.1% y/y decline in computer prices. That drop was comparable to the 22% and 25% price declines during 2001 and 2002.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/051018b.jpg" width="353">
Consumer durable goods prices rose 0.4% (+1.5% y/y) led by increases in floor coverings (7.5% y/y), household furniture (3.6% y/y) and jewelry (3.8% y/y). Core consumer nondurable goods prices rose 0.2% (3.6% y/y).
Gasoline prices jumped 12.8% (63.6% y/y) while fuel oil prices surged 11.3% (57.1% y/y). Natural gas prices also posted a strong 8.1% (24.7% y/y) increase and in October the spot gas price has pushed nearly to $14.00/mmbtu, more than double the year ago level.
Intermediate goods prices surged 2.5%, the strongest monthly increase since 1980 while core intermediate goods prices rose 1.2%, the strongest gain since April of last year.
A 16.9% (64.4% y/y) spike in crude energy prices lifted overall crude goods prices by 10.2%.and that pulled the y/y gain to its highest since early 2003. Core crude prices jumped for the third straight month. During the last thirty years &quot;core&quot; crude prices have been a fair indicator of industrial sector activity with a 48% correlation between the six month change in core crude prices and the change in factory sector industrial production.
Federal Reserve Board Chairman Alan Greenspan&#39;s speech on Energy is available <a href="http://www.federalreserve.gov/boarddocs/speeches/2005/20051017/default.htm"> here</a>.
Inflation Expectations: How The Market Speaks from the Federal Reserve Bank of San Francisco can be found <a href="http://www.frbsf.org/publications/economics/letter/2005/el2005-25.pdf"> here</a>.

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<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@E8/@E802/@E80201/@E80201.HTM">Producer Price Index</a></th>
<th scope="col">Sept</th>
<th scope="col">Aug</th>
<th scope="col">Y/Y</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
<th scope="col">2002</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Finished Goods</td>
<td>1.9%</td>
<td>0.6%</td>
<td>6.7%</td>
<td>3.6%</td>
<td>3.2%</td>
<td>-1.3%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Core</td>
<td>0.3%</td>
<td>0.0%</td>
<td>2.5%</td>
<td>1.5%</td>
<td>0.2%</td>
<td>0.1%</td>
</tr>
<tr class="odd">
<td class="firstcol">Intermediate Goods</td>
<td>2.5%</td>
<td>0.7%</td>
<td>8.4%</td>
<td>6.6%</td>
<td>4.6%</td>
<td>-1.5%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Core</td>
<td>1.2%</td>
<td>-0.1%</td>
<td>3.5%</td>
<td>5.7%</td>
<td>2.0%</td>
<td>-0.5%</td>
</tr>
<tr class="odd">
<td class="firstcol">Crude Goods</td>
<td>10.2%</td>
<td>2.3%</td>
<td>28.5%</td>
<td>17.5%</td>
<td>25.1%</td>
<td>-10.6%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Core</td>
<td>5.3%</td>
<td>4.6%</td>
<td>6.5%</td>
<td>26.6%</td>
<td>12.4%</td>
<td>3.8%</td>
</tr>
</tbody>
</table>
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The overall Producer Price Index jumped 1.9% last month, easily surpassing Consensus expectations for a 1.1% increase. The gain was the largest since January 1990 and was led by a 7.1% leap in energy prices which also was the [...]

September PPI Up 1.9%: Spillover Effects?

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/051018a.jpg" width="353">
The overall Producer Price Index jumped 1.9% last month, easily surpassing Consensus expectations for a 1.1% increase. The gain was the largest since January 1990 and was led by a 7.1% leap in energy prices which also was the strongest since 1990.
The so called &quot;core&quot; PPI index is focused on since it provides an indication of the degree to which pressures on energy or food prices may be &quot;spilling over.&quot; Finished goods prices less food &amp; energy increased 0.3% in September. The rise beat Consensus expectations for a 0.2% increase and followed no change in prices during the previous month.
And these spillover effects may indeed be now more apparent than earlier for several reasons. 1) The y/y change in core prices held at 2.5%, up from 0.1% and 0.2% during 2002 and 2003, respectively. 2) Prices for core consumer goods rose 0.2% and the y/y gain held at 2.6% versus a 0.1% increase in 2003. 3) Capital equipment prices rose 0.3%. The y/y gain rose to 2.3% from -0.4% during 2002 despite a 22.1% y/y decline in computer prices. That drop was comparable to the 22% and 25% price declines during 2001 and 2002.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/051018b.jpg" width="353">
Consumer durable goods prices rose 0.4% (+1.5% y/y) led by increases in floor coverings (7.5% y/y), household furniture (3.6% y/y) and jewelry (3.8% y/y). Core consumer nondurable goods prices rose 0.2% (3.6% y/y).
Gasoline prices jumped 12.8% (63.6% y/y) while fuel oil prices surged 11.3% (57.1% y/y). Natural gas prices also posted a strong 8.1% (24.7% y/y) increase and in October the spot gas price has pushed nearly to $14.00/mmbtu, more than double the year ago level.
Intermediate goods prices surged 2.5%, the strongest monthly increase since 1980 while core intermediate goods prices rose 1.2%, the strongest gain since April of last year.
A 16.9% (64.4% y/y) spike in crude energy prices lifted overall crude goods prices by 10.2%.and that pulled the y/y gain to its highest since early 2003. Core crude prices jumped for the third straight month. During the last thirty years &quot;core&quot; crude prices have been a fair indicator of industrial sector activity with a 48% correlation between the six month change in core crude prices and the change in factory sector industrial production.
Federal Reserve Board Chairman Alan Greenspan&#39;s speech on Energy is available <a href="http://www.federalreserve.gov/boarddocs/speeches/2005/20051017/default.htm"> here</a>.
Inflation Expectations: How The Market Speaks from the Federal Reserve Bank of San Francisco can be found <a href="http://www.frbsf.org/publications/economics/letter/2005/el2005-25.pdf"> here</a>.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@E8/@E802/@E80201/@E80201.HTM">Producer Price Index</a></th>
<th scope="col">Sept</th>
<th scope="col">Aug</th>
<th scope="col">Y/Y</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
<th scope="col">2002</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Finished Goods</td>
<td>1.9%</td>
<td>0.6%</td>
<td>6.7%</td>
<td>3.6%</td>
<td>3.2%</td>
<td>-1.3%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Core</td>
<td>0.3%</td>
<td>0.0%</td>
<td>2.5%</td>
<td>1.5%</td>
<td>0.2%</td>
<td>0.1%</td>
</tr>
<tr class="odd">
<td class="firstcol">Intermediate Goods</td>
<td>2.5%</td>
<td>0.7%</td>
<td>8.4%</td>
<td>6.6%</td>
<td>4.6%</td>
<td>-1.5%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Core</td>
<td>1.2%</td>
<td>-0.1%</td>
<td>3.5%</td>
<td>5.7%</td>
<td>2.0%</td>
<td>-0.5%</td>
</tr>
<tr class="odd">
<td class="firstcol">Crude Goods</td>
<td>10.2%</td>
<td>2.3%</td>
<td>28.5%</td>
<td>17.5%</td>
<td>25.1%</td>
<td>-10.6%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Core</td>
<td>5.3%</td>
<td>4.6%</td>
<td>6.5%</td>
<td>26.6%</td>
<td>12.4%</td>
<td>3.8%</td>
</tr>
</tbody>
</table>
Chain Store Sales Rose Again Last Week 
by <a href="/comment/Moeller.html">Tom Moeller</a> October 18, 2005


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/051018c.jpg" width="353">
Chain store sales rose for the fourth consecutive week. Last week&#39;s 0.4% increase, according to the International Council of Shopping Centers (ICSC)-UBS survey, lifted sales 1.3% above the mid-September low. 
During the last ten years there has been a 56% correlation between the y/y change in chain store sales and the change in non-auto retail sales less gasoline, as published by the US Census Department. Chain store sales correspond directly with roughly 14% of non-auto retail sales less gasoline.
The leading indicator of chain store sales from ICSC squeaked out a 0.1% (-2.5% y/y) increase.
The ICSC-UBS retail chain-store sales index is constructed using the same-store sales (stores open for one year) reported by 78 stores of seven retailers: Dayton Hudson, Federated, Kmart, May, J.C. Penney, Sears and Wal-Mart.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col></colgroup>
<thead>
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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/surveyw/@S2/@S2.HTM">ICSC-UBS (SA, 1977=100)</a></th>
<th scope="col">10/15/05</th>
<th scope="col">10/08/05</th>
<th scope="col">Y/Y</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">Total Weekly Chain Store Sales</td>
<td>450.6</td>
<td>448.9</td>
<td>3.3%</td>
<td>4.6%</td>
<td>2.9%</td>
</tr>
</tbody>
</table>
Germany's ZEW Results Are Disappointing: Political Uncertainty and Inflation Causes?  
by <a href="/comment/Curley.html">Louise Curley</a> October 18, 2005


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/051018d.jpg" width="353">
The results of Germany&#39;s latest ZEW survey, released today, were below consensus, showing only a slight improvement in October in the balances between optimists and pessimists among German institutional investors and analysts regarding current economic conditions and those expected six months ahead. The disappointing results of the survey may be due, in part, to the uncertainty arising out of the inconclusive election held last month. A coalition government between the CDU/CSU (Christian Democratic Union, and Christian Social Union), with their narrow victory of four seats, and the SPD (Social Democratic Party) has been agreed upon with Angela Merkel as Chancellor.However, the process of selecting a cabinet, now underway is revealing what may be potentially serious differences among the possible candidates. The process is not expected to be over much before November 17 when the Bundestag formally installs the new Chancellor and pronounces the new government operational. <img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/051018e.jpg" width="353">
Pessimists continue to outweigh optimists in their appraisal of current conditions. The balance between those expecting current conditions to improve and those who expect them to worsen rose a mere one-tenth of one percent from -58.1% to 58.0%. When they look ahead, the respondents to the survey are more optimistic. The balance between those expecting better conditions six months ahead and those expecting worse conditions rose by 0.8% in October to 39.4% from 38.6% in September. The contrast between the respondents&#39; appraisal of current conditions and their appraisal of expectations six months ahead is shown in the first chart.
Inflation is another factor that may be influencing sentiment among institutional investors and analysts.Eurostat published today the Harmonized Consumer Prices Index for the Euro Zone and the individual countries of the area. In addition, indexes of core inflation, defined as the total index excluding, energy, food, alcohol and tobacco, are also published. For Germany, the year to year increase in the total index was 2.61%, up from 1.89% in both August and July. Although core inflation also rose, it remains at low levels, lower than in some of the earlier months of the year. Core inflation was 0.56% in September, compared with 0.46% in August and 055% in July. The Harmonized Consumer Price index and its related Core Inflation index are shown in the second chart.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">Percent Balance of Opinion German ZEW Survey</th>
<th scope="col">Oct 05&nbsp;</th>
<th scope="col">Set&nbsp; 05</th>
<th scope="col">Aug 04</th>
<th scope="col">M/M&nbsp; Dif</th>
<th scope="col">Y/Y Dif</th>
<th scope="col">2004 &nbsp;</th>
<th scope="col">2003 &nbsp;</th>
<th scope="col">2002&nbsp;&nbsp;</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Current Conditions</td>
<td>-58.0</td>
<td>-58.1</td>
<td>-58.9</td>
<td>0.1</td>
<td>0.9</td>
<td>-67.7</td>
<td>-92.6</td>
<td>-83.3</td>
</tr>
<tr>
<td class="firstcol">Expectations 6-months ahead</td>
<td>39.4</td>
<td>38.6</td>
<td>31.3</td>
<td>0.8</td>
<td>8.1</td>
<td>44.6</td>
<td>38.4</td>
<td>45.3</td>
</tr>
<tr class="odd">
<td class="firstcol"></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr>
<td class="firstcol">German Harmonized Consumer Price Index&nbsp;</td>
<td>Y/Y&nbsp;&nbsp;&nbsp; %&nbsp;</td>
<td>Y/Y&nbsp;&nbsp;&nbsp; %&nbsp;</td>
<td>Y/Y&nbsp;&nbsp;&nbsp; %&nbsp;</td>
<td>Y/Y&nbsp;&nbsp;&nbsp; %&nbsp;</td>
<td>Y/Y&nbsp;&nbsp;&nbsp; %&nbsp;</td>
<td>Y/Y&nbsp;&nbsp;&nbsp; %&nbsp;</td>
<td>Y/Y&nbsp;&nbsp;&nbsp; %&nbsp;</td>
<td>Y/Y&nbsp;&nbsp;&nbsp; %&nbsp;</td>
</tr>
<tr class="odd">
<td class="firstcol"></td>
<td>Sep 05&nbsp;</td>
<td>Aug&nbsp; 05</td>
<td>July 05</td>
<td>Jun 05</td>
<td>May 05&nbsp;</td>
<td>Apr 05</td>
<td>&nbsp;Mar05</td>
<td>&nbsp;Feb 05</td>
</tr>
<tr>
<td class="firstcol">Harmonized CPI total</td>
<td>2.61</td>
<td>1.89</td>
<td>1.89</td>
<td>1.81</td>
<td>1.63</td>
<td>1.45</td>
<td>1.72</td>
<td>1.82</td>
</tr>
<tr class="odd">
<td class="firstcol">Harmonized CPI core</td>
<td>0.56</td>
<td>0.46</td>
<td>0.55&nbsp;</td>
<td>0.46&nbsp;</td>
<td>0.84&nbsp;</td>
<td>0.28&nbsp;</td>
<td>0.74&nbsp;</td>
<td>0.65&nbsp;</td>
</tr>
</tbody>
</table>


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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/051017f.jpg" width="353">
Among industrial countries the rise in inflation as measured by the year over year increase in the consumer price index has, to date, been relatively well contained in spite of the rise in energy costs. Inflation at the wholesale and producer levels where the impact of higher energy costs are more directly felt has, however, begun to accelerate. If past relationships hold, the pace of consumer price inflation should begin to step up.
Denmark and Finland , two countries reporting wholesale and producer price indexes today are illustrative of these trends. Most countries no longer distinguish between wholesale and producer price indexes, publishing only the producer price index, but these countries still publish both indexes. The composition of the indexes are not strictly comparable. In September, the Danish index of fuel and oil in the wholesale index rose 47.32% over September, 2004 the wholesale index was up 5.32%, the producer price index, 7.12% and the consumer price index, 2.39%. The first chart shows the year over year increases in the producer price and the consumer price indexes for Denmark. <img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/051017e.jpg" width="353">
The September Finnish index of energy costs was 15.50% above the index of September, 2004. The wholesale price index was up 3.83%, the producer price index, 2.67% and the consumer price index, 1.14% The second chart shows the year over year increases in the producer price and consumer price indexes for Finland. <img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/051017g.jpg" width="353">
Inflation in Finland has been lower than that in Denmark since late 2001. One factor accounting for the difference could be different monetary policies in the two countries. As a member of the Euro Zone, Finland has been subject to a somewhat tighter monetary policy than that in Denmark, which is outside the Euro Zone. The third chart shows the official base rates in the two countries as an indicator of monetary policy. Since late 2001, the base rate in Finland has been above that in Denmark.

<table border="0" cellspacing="0" width="100%">

</table>
<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">&nbsp;Price Indexes (2000=100)</th>
<th scope="col">Sep 05&nbsp;</th>
<th scope="col">Aug 05</th>
<th scope="col">Sep 04</th>
<th scope="col">M/M&nbsp; %</th>
<th scope="col">Y/Y %</th>
<th scope="col">2004 &nbsp;%</th>
<th scope="col">2003 %</th>
<th scope="col">2002 %</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Denmark</td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr>
<td class="firstcol">&nbsp; Fuel and Oil Prices (PPI)</td>
<td>165.8</td>
<td>157.9</td>
<td>116.5</td>
<td>5.04</td>
<td>42.33</td>
<td>107.8</td>
<td>92.9</td>
<td>89.3</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Producer Price Index</td>
<td>111.3</td>
<td>110.5</td>
<td>103.9</td>
<td>0.72</td>
<td>7.12</td>
<td>103.0</td>
<td>100.8</td>
<td>101.0</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Wholesale Price Index</td>
<td>110.9</td>
<td>110.3</td>
<td>105.3</td>
<td>0.54</td>
<td>5.32</td>
<td>104.5</td>
<td>102.3</td>
<td>102.1</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Consumer Price Index</td>
<td>111.2</td>
<td>110.3</td>
<td>108.6</td>
<td>0.82</td>
<td>2.39</td>
<td>108.3</td>
<td>107.0</td>
<td>104.8</td>
</tr>
<tr>
<td class="firstcol"></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;Finland</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Energy Costs (WPI)</td>
<td>&nbsp;136.4</td>
<td>134.6&nbsp;</td>
<td>118.1</td>
<td>1.34</td>
<td>15.50</td>
<td>&nbsp;113.9</td>
<td>107.5&nbsp;</td>
<td>101.1&nbsp;</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Producer Price Index</td>
<td>96.1</td>
<td>65.6</td>
<td>63.6</td>
<td>0.52</td>
<td>2.67</td>
<td>93.1</td>
<td>92.8</td>
<td>94.7</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Wholesale Price Index</td>
<td>102.9</td>
<td>102.7</td>
<td>99.1</td>
<td>0.19</td>
<td>3.83&nbsp;</td>
<td>98.3&nbsp;</td>
<td>97.4&nbsp;</td>
<td>97.7&nbsp;</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Consumer Price Index</td>
<td>&nbsp;106.9</td>
<td>106.3&nbsp;</td>
<td>105.7</td>
<td>.0.56</td>
<td>1.14&nbsp;</td>
<td>105.3&nbsp;</td>
<td>105.1&nbsp;</td>
<td>104.2&nbsp;</td>
</tr>
</tbody>
</table>
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Among industrial countries the rise in inflation as measured by the year over year increase in the consumer price index has, to date, been relatively well contained in spite of the rise in energy costs. Inflation at the wholesale and [...]

Rising Producer and Wholesale Price Indexes: A Prelude to Rising Consumer Price Indexes?

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<img align="left" border="0" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/051017a.jpg">
The Empire State Index of General Business Conditions in New York&#39;s manufacturing industries for October fell unexpectedly to 12.08 from a downwardly revised 15.58 in September. Consensus expectations had been for improvement to 19.0.
Since the series&#39; inception in 2001 there has been a close 80% correlation between the index level and the three month change in factory sector production.
Lower shipments and employment indexes figured largely in the October report, although the new orders index recovered more than half of the prior month&#39;s sharp decline. Prices paid rose to near the record high levels of late last year. <img align="right" border="0" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/051017b.jpg">
Like the Philadelphia Fed Index of General Business Conditions, the Empire State Business Conditions Index reflects answers to an independent survey question; it is not a weighted combination of the components.
The index of expectations for business conditions in six months fell to the lowest level since 2001 and expectations for future capital spending fell slightly.
The Empire State Manufacturing Survey is a monthly survey of manufacturers in New York State conducted by the Federal Reserve Bank of New York. Participants from across the state in a variety of industries respond to a questionnaire and report the change in a variety of indicators from the previous month. Respondents also state the likely direction of these same indicators six months ahead. April 2002 is the first report, although survey data date back to July 2001.
For more on the Empire State Manufacturing Survey, including methodologies and the latest report, click <a href="http://www.newyorkfed.org/research/regional_economy/empiresurvey_overview.html">here</a>.

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<colgroup><col><col><col><col><col><col></colgroup>
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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/SURVEYS/@S5/@S511/@S511.HTM">Empire State Manufacturing Survey</a> </th>
<th scope="col">Oct</th>
<th scope="col">Sept</th>
<th scope="col">Oct &#39;04</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
<th scope="col">2002</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">General Business Conditions (diffusion index)</td>
<td>12.08</td>
<td>15.58</td>
<td>23.75</td>
<td>28.76</td>
<td>16.17</td>
<td>7.19</td>
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The Empire State Index of General Business Conditions in New York's manufacturing industries for October fell unexpectedly to 12.08 from a downwardly revised 15.58 in September. Consensus expectations had been for improvement to 19.0. [...]

October Empire State Index Fell Unexpectedly

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<img align="left" border="0" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/051017c.jpg">
The U.S. federal government ran a budget deficit of $318.6B during FY05, down nearly one quarter from the record deficit of $412.1B during the prior fiscal year.As a percentage of GDP, the deficit fell to 2.6% from 3.6% in FY04.
Net receipt growth of 14.6% during FY05 was capped by a 62.5% m/m spike in September. That gain was led by a 31.6% m/m rise in individual income taxes (44% of total receipts) which followed an 18.3% August increase. For the fiscal year, the 14.6% rise in individual income taxes was the strongest since 1981.
Corporate income taxes (10% of total receipts) also reflected the improved economy and spiked higher in September. The 47.0% y/y gain during FY05 was the strongest since 1952 and followed a 43.7% jump the prior year. <img align="right" border="0" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/051017d.jpg">
The improved job market raised employment taxes (36% of total receipts) 8.8% y/y during all of FY 2005, the strongest increase since 1988. 
U.S. net outlays grew 7.9% during FY05. Federal outlays on defense (19% of total outlays) continued to surge but the 8.3% gain during FY05 actually was down from 12.8% growth during FY04 and from 15.9% during FY 03. Medicare spending (12% of total outlays) surged during the last two months and lifted FY05 growth to 10.9%, the strongest since 1992. Spending on social security (21% of total outlays) fell in September and the decline limited the increase during FY 05 to a still high 5.6%. Spending on health programs (10% of the total) rose 4.3% during FY05 while spending on education &amp; training (4% of the total) surged 11.3%. interest expense (8% of the total) grew 14.9% with higher interest rates versus a modest rise last year and declines during the prior six fiscal years. 
Do Budget Deficits Cause Inflation? from the Federal Reserve Bank of Philadelphia can be found <a href="http://www.philadelphiafed.org/files/br/Q3_05_Sill.pdf"> here</a>.

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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@E1/@E106/@E10602/@E10602.HTM">US Government Finance</a></th>
<th scope="col">Sept</th>
<th scope="col">Aug</th>
<th scope="col">FY 2005 </th>
<th scope="col">FY2004</th>
<th scope="col">FY2003</th>
<th scope="col">FY2002</th>
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<td class="firstcol">Budget Balance</td>
<td>$35.8B</td>
<td>$-51.6B</td>
<td>$-318.6B</td>
<td>$-412.1B</td>
<td>$-377.6B</td>
<td>$-157.8B</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Net Revenues</td>
<td>$252.6B</td>
<td>$155.4B</td>
<td>14.6%</td>
<td>5.5%</td>
<td>-3.8%</td>
<td>-6.9%</td>
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<tr class="odd">
<td class="firstcol">&nbsp; Net Outlays</td>
<td>$216.8B</td>
<td>$207.0B</td>
<td>7.9%</td>
<td>6.2%</td>
<td>7.4%</td>
<td>7.9%</td>
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The U.S. federal government ran a budget deficit of $318.6B during FY05, down nearly one quarter from the record deficit of $412.1B during the prior fiscal year.As a percentage of GDP, the deficit fell to 2.6% from 3.6% in FY04. Net [...]

FY 2005 U.S. Budget Deficit Fell Due To Higher Receipts

USD/EUR exchange rate uncoupling from interest rate differential

Widespread downgrading of 2025 GDP outlook

Trade and fiscal policy uncertainty has exploded with the new administration

Much lower US electricity costs gives it a competitive advantage

Wage growth slowing in the US and Euro area; elevated and sticky in the UK

Stagflation-lite: Blue Chip forecasts below-trend growth and elevated inflation

US policy gyrations boosting policy uncertainty worldwide

Expected tariff hikes have boosted inflation expectations

US and Japan ended 2024 on solid ground in contrast to Europe

US economy expected to outperform other major economies in 2025

Only modest evidence of AI-related surge in US productivity growth

Previous Trump tariffs fading. A boost from new tariffs ahead?

Heavy US manufacturing states underperforming while Sun Belt states outperforming

Rising long-term yields a global phenomenon

US financial market concerns shifting from growth to inflation

Economic activity is picking up in the US but remains lackluster abroad

Policy uncertainty has surged since the US national elections.

Recent turnaround in US economic surprises leading to increases in rate-cut expectations

The outlook has brightened in the US, while it has dimmed for other major economies

Headline US PCE inflation elevated by sticky services prices

US and global equity prices have recently diverged

US leading global upturn in economic surprises

Blue Chip forecasters look for further significant monetary easing apart from Japan

Recent rise in global supply chain pressures could augur a pickup in global inflation pressures

Underperforming German economy generating increased policy uncertainty relative to Europe and the US

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Andrew Cates

**China-US shipping activity** 
The economic fallout from escalating US-China trade tensions is becoming increasingly visible in the data. A clear example is the chart below, which highlights a sharp drop in vessel arrivals at the ports of Los Angeles and Long Beach, along with a notable decline in ships waiting offshore. These trends point to a tangible weakening in bilateral trade flows, as the effects of tit-for-tat tariffs imposed by both countries begin to bite. Given the outsized role the US and China play in global commerce, this slowdown is likely to reverberate through global supply chains, weighing on trade volumes, dampening demand, and curbing economic growth worldwide.

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**GDP growth in Q1**
Data this week showed that the US economy contracted, albeit modestly, in Q1 even as the euro area recorded a modest expansion—an unusual divergence. The contraction in US GDP can be largely attributed to a sharp increase in imports, as firms rushed to front-load purchases ahead of anticipated tariff hikes. In addition, domestic demand was subdued, with weaker contributions from both consumer spending and government consumption. This decoupling between the US and euro area economies is particularly striking given the current global focus on the US dollar. While the euro area has shown unexpected signs of resilience, the US downturn raises important questions about its underlying momentum, especially as trade dynamics and policy uncertainty continue to cloud the outlook.

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**The US dollar versus yield differentials**
Chart 3 below illustrates a sharp breakdown in the correlation between the US-Germany 10-year yield differential and the EUR/USD exchange rate. Historically, the dollar has moved closely with interest rate spreads, as yield-seeking capital flowed into US assets. But since early 2025—and more acutely following the April tariff actions—the dollar has weakened markedly even as the yield spread has narrowed only modestly. This decoupling underscores a critical shift: capital markets are reacting not just to monetary policy, but to rising trade and geopolitical uncertainty. In other words, the exchange rate is now being driven as much by risk sentiment as by interest rate arbitrage.

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**The US economy’s structural outperformance and the dollar**
A second dynamic, captured in the next chart, reveals a tight correlation between the US real effective exchange rate and the potential GDP growth differential between the US and euro area over the past 50-60 years. This raises the question: has dollar strength (until recently) merely been a reflection of US growth leadership—or are capital inflows themselves helping to sustain this growth outperformance? In effect, the tail may be wagging the dog. Global investors have long allocated capital to the US, attracted by its macroeconomic resilience, technological leadership, and deep, liquid financial markets. The danger now is that the US trade war may disrupt this equilibrium. A sharp or sustained reduction in capital inflows could undermine growth, weaken the dollar, and trigger broader financial instability. Moreover, reversing this dynamic is not straightforward—barring a credible structural resurgence in European (or Asian) growth, the global investment landscape remains tilted toward the US.

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**US competitiveness versus Europe, China and Japan** 
The next chart below examines relative unit labour costs across major economies since 2011. The US and China have seen a broadly similar trajectory, with steady increases in relative cost structures, while the euro area has remained flat and Japan has seen dramatic improvement. This suggests that, from a cost competitiveness standpoint, the US is not uniquely disadvantaged vis-à-vis China. However, as we discuss further below, this parallel erosion of cost competitiveness is occurring at much higher nominal wage levels in the US, which blunts its ability to regain export share through tariff-related shifts alone. The trade war strategy—absent a corresponding improvement in productivity or structural reforms—risks imposing costs without delivering material competitiveness gains.

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**Average wages in selected developed and developing economies**
This point is reinforced by the final chart, which shows estimates for average monthly wages across countries in 2024. US labour remains much more expensive than in peer or emerging economies. So even if China’s costs rise in tandem with the US, the global supply chain has ample alternatives. 'China plus one' strategies are accelerating, and the US remains structurally misaligned with low-cost production hubs. Tariffs aimed at reshoring supply chains are unlikely to deliver sustained gains unless accompanied by deep supply-side reforms, and risk further disincentivizing foreign direct investment if global firms perceive US trade policy as erratic or punitive.

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Financial markets found a measure of calm this week, buoyed by some subtle shifts in tone from US policymakers. A softening in the administration’s rhetoric around trade tariffs coupled with a less confrontational stance toward Federal Reserve Chair Jerome Powell, helped ease tensions that had roiled markets earlier in the month. Equities rebounded modestly, and volatility indicators edged lower, reflecting cautious optimism that the worst of the policy shocks may be behind us. But beneath the surface, significant downside risks persist. New shipping data point to a pronounced slowdown in US-China trade flows (chart 1), suggesting the damage from recent tariff escalations is already rippling through global supply chains. Meanwhile, incoming data for the US revealed an unexpected contraction in the economy in Q1 and further signs of weakness in the labour market (chart 2). The US dollar, in the meantime, while long supported by superior growth and yield differentials, has begun to decouple from traditional drivers (charts 3 and 4) suggesting growing pressure on capital flows. At the same time, structural imbalances are drawing renewed scrutiny: unit labour cost comparisons show the US steadily losing competitiveness (chart 5), while nominal wage disparities remain stark versus China and other Asian economies, further complicating any effort to restore trade balance without broader reforms (chart 6). In short, while markets may be drawing temporary comfort from a pause in tariff brinkmanship, the deeper economic and financial vulnerabilities exposed this month remain unresolved—and increasingly central to the global macro narrative.

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Charts of the Week: Tariff Truce, Tenuous Trust

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U.S. light vehicle sales dropped 2.9% (+6.5% y/y) to 17.31 million units (SAAR) in April after surging 10.8% to 17.82 million units in March. The retreat in April vehicle sales accompanied a 1.7% y/y rise in real disposable income through March, which compared to 2.0% growth last year.

Sales declines were broad-based last month. Light truck sales fell 1.3% (+9.9% y/y) during April to 14.34 million units (SAAR), after rising 12.4% in March. Purchases of domestically-made light trucks declined 1.2% (+11.9% y/y) to 11.02 million units, after jumping 12.5% in March. Sales of imported light trucks fell 1.8% (+4.4% y/y) to 3.32 million units, following an 11.6% March surge.

Trucks’ record 82.8% share of the light vehicle market last month compared to 81.5% in March and 80.3% in April of last year. The share averaged 80.3% during all of 2024 versus 53.3% ten years earlier.

Auto sales also declined last month, down 9.5% (-7.5%) to 2.97 million units (SAAR) following a 3.5% March rise. The decline reversed all of the increase over the prior two months. Purchases of domestically-produced cars fell 9.8% (-4.3% y/y) last month to 2.22 million units, after rising 3.8% in March. Sales of imported autos declined 9.6% (-15.7% y/y) to 0.75 million units, following a 2.5% March increase.

Imports' 23.5% share of the U.S. light vehicle market was little changed from 23.6% in March and compared to a May 2023 low of 22.9% and a high of 26.3% in November of 2023. Imports' share of the passenger car market held steady at 25.3% last month and compared to 27.7% in April of last year. It reached a high of 38.7% in September 2021. Imports' share of the light truck market eased to 23.2% last month after falling to 23.3% in March.

U.S. vehicle sales figures can be found in Haver's **USECON** database. Additional detail by manufacturer is in the I**NDUSTRY** database.

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- Light truck sales pull back, while auto sales tumble.
- Both domestic and imported sales decline.
- Imports' market share slips further.

U.S. Light Vehicle Sales Fall in April

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The ISM Purchasing Managers Index of activity in the manufacturing sector slipped to 48.7 in April from 49.0 during March and 50.3 in February. It remained up from a low of 46.9 in October of last year. A level of 50 is the break-even point between a rising and falling level of activity. The Action Economics Forecast Survey expected a reading of 47.8 for April. The series reached a monthly high of 63.8 in March 2021.

Two of the five component indexes weakened last month. The April production index fell to 44.0 after declining to 48.3 in March. It was the lowest level since May 2020. A lessened 19.8% (NSA) of respondents reported higher production while an increased 24.2% reported lower output. The inventories index declined to 50.8 last month from 53.4 in March. The index remained up from a low of 43.2 in October of last year.

Moving higher, the new orders index rose to 47.2 last month from 45.2 in March. The index remained below a January high of 55.1. Twenty-eight percent (NSA) of respondents reported higher new orders while 26.7% reported a decline. The employment index rose to 46.5 from 44.7 in March. It was below a high of 50.3 in January. A greater 13.1% (NSA) of respondents reported more hiring while a fewer 16.2% indicated less. The supplier delivery index rose to 55.2 from 53.5 in March. A higher 16.6% (NSA) of respondents reported slower delivery speeds while a fairly steady 6.2% reported a quickening.

The prices index, which is not part of the composite series, edged up to 69.8 (NSA) in April after increasing to 69.4 in March. It was the highest level since June 2022, up from a December 2022 low of 39.4. An increased 49.2% of respondents reported higher prices last month, up from 12.2% in November, while a higher 9.7% reported lower prices.

In other series, the export orders index plummeted to 43.1 in April from 49.6 during March. It was down from the high of 52.4 in January. The imports index fell sharply to 47.1 from 50.1 in March. It was the lowest reading since December 2023. The order backlog index dropped to 43.7 (NSA) last month from 44.5 in March. It was the lowest level in five months.

The ISM figures are based on responses from over 400 purchasing executives from 18 industries, which are weighted according to each industry’s contribution to GDP. These indexes are diffusion indexes where a reading above 50 indicates expansion and a reading below 50 points to contraction. The figures from the Institute for Supply Management can be found in Haver’s **USECON** database; further detail is found in the **SURVEYS** database. The expectations number is available in Haver’s **AS1REPNA** database.

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- Declines in last three months follow earlier improvement.
- Production & inventories account for m/m shortfall.
- Prices index edges up to another three-year high.

U.S. ISM Manufacturing Index Indicates Contraction in April

Winnie Tapasanun

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The value of construction put in place unexpectedly fell 0.5% m/m in March after rises of 0.6% in February (+0.7% initially) and 0.1% in January (-0.5% previously), data from the U.S. Census Bureau showed. The March reading was the first m/m fall following five straight m/m gains. A 0.3% m/m March rise had been expected in the Action Economics Forecast Survey. The year-on-year rate of increase decelerated to 2.8% in March, the lowest since May 2019, after registering at 3.4% in February and January. The latest y/y figure was lower than 8.7% in March 2024; thus, having remained below its recent high of 9.8% in January 2024 and a peak of 18.6% in April 2022.

Private construction slid 0.6% (+2.3% y/y) in March, down for the first time since September, following increases of 0.7% in February (+0.9% initially) and 0.1% in January (-0.7% previously). Residential private construction fell 0.4% (+2.8% y/y) in March, the first m/m fall in six months, after an unrevised 1.3% gain in February. Home improvement building dropped 1.2% (+13.4% y/y), the first m/m decline since December, following a 2.3% February gain; it was 41.1% of the residential private construction. Single-family building edged up 0.1% (-0.8% y/y), the smallest of seven consecutive m/m increases, after a 0.8% February rise; it was 46.6% of the residential private construction. Meanwhile, multi-family building was essentially unchanged m/m (-12.1% y/y) in March following 15 straight m/m decreases; it was 12.3% of the residential private construction.

Nonresidential private construction fell 0.8% (+1.6% y/y) in March after a 0.1% increase in February (+0.4% initially) and a 0.1% easing in January (-0.2% previously). The March fall reflected m/m drops in the following nonresidential private constructions. These included religious (-2.9%; +16.4% y/y), health care (-2.2%; -5.2% y/y), office (-1.8%; +2.7% y/y), educational (-1.7%; -4.2% y/y), lodging (-1.6%; -1.0% y/y), commercial (-1.0%; -5.8% y/y), manufacturing (-0.4%; +3.6% y/y), communication (-0.3%; +2.2% y/y), and utilities (-0.1%; +7.0% y/y). In contrast, private constructions for amusement & recreation (1.5%; 7.0% y/y) and transportation (0.7%; 10.2% y/y) rose m/m in March.

The value of public construction declined 0.2% (+4.7% y/y) in March after holding steady in February (+0.2% initially), reflecting a 0.2% increase (-1.9% y/y) in residential public construction and a 0.2% easing (+4.8% y/y) in nonresidential public construction. The March decline reflected m/m drops in the following nonresidential public constructions. These included utilities (-4.8%; -12.8% y/y), commercial (-1.6%; +40.3% y/y), amusement & recreation (-1.0%; +19.1% y/y), educational (-0.6%; +7.6% y/y), sewage & waste disposal (-0.6%; +10.6% y/y), and health care (-0.4%; +13.0% y/y). Notably, spending on highways & streets, which made up 28.7% of public construction spending, fell 0.5% (-2.4% y/y) in March, the first m/m fall since October, following a 0.9% increase in February. To the upside, the following public constructions rose m/m in March: office (1.6%; 6.0% y/y), transportation (1.4%; 7.3% y/y), public safety (0.7%; 4.1% y/y), conservation & development (0.6%; 4.7% y/y), and water supply (0.6%; 12.2% y/y).

The construction figures can be found in Haver's **USECON** database. The expectations figure is from the Action Economics Forecast Survey in **AS1REPNA**.

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- March construction spending -0.5% m/m; +2.8% y/y, the lowest y/y rate since May ’19.
- Residential private construction -0.4% m/m, led by a 1.2% drop in home improvement building.
- Nonresidential private construction -0.8% m/m, down for the second month in three.
- Public sector construction -0.2% m/m, reflecting a 0.2% decline in nonresidential public building.

U.S. Construction Spending Unexpectedly Drops in March, the First M/M Fall Since September

Carol Stone, CBE

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Initial claims for unemployment insurance rose 18,000 in the week ended April 26 to 241,000, seasonally adjusted.  This is higher by 16,000 than the Action Economics Forecast Survey amount of 225,000 and is the largest amount since the week of February 22. The previous week’s actual count was revised up by 1,000 to 223,000, from 222,000 reported initially.

The total number of unemployment insurance beneficiaries – also known as “continuing claims” – in the week ended April 19 was 1.916 million, up 83,000 from the prior week’s 1.833 million; that earlier amount was revised down by 8,000.

The insured unemployment rate, that is, the number of beneficiaries as a percentage of covered employment, was 1.3% in the April 19 week, following 1.2% continuously since the week of January 6, 2024.

Economic conditions vary widely across states and territories.  In the week ended April 12, the highest unemployment rates were in New Jersey (2.39%), California (2.24%), Washington (2.19%), Rhode Island (2.17%) and Massachusetts (1.93%).  The lowest rates were in Florida (0.35%), South Dakota (0.40%), Alabama (0.41%), Virginia (0.45%) and Tennessee (0.48%).  Rates in other notable states include the Illinois (1.85%), New York (1.71%), Pennsylvania (1.54%) and Texas (1.09%). These state data are not seasonally adjusted.

Data on weekly unemployment claims are from the Department of Labor itself, not the Bureau of Labor Statistics. They begin in 1967 and are contained in Haver’s **WEEKLY** database and summarized monthly in U**SECON**. Data for individual states are in **REGIONW** back to December 1986. The expectations figure is from the Action Economics Forecast Survey in the **AS1REPNA** database.

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- Actual initial claims amount is 16,000 more than forecast.
- Total beneficiaries rose by 83,000.
- Insured unemployment rate ticked up to 1.3% after 15 months at 1.2%.

Economy in Brief: October 2005

Jump to:

Housing Starts Firm

Germany's ZEW Results Are Disappointing: Political Uncertainty and Inflation Causes?

Chain Store Sales Rose Again Last Week

September PPI Up 1.9%: Spillover Effects?

September PPI Up 1.9%: Spillover Effects?

Rising Producer and Wholesale Price Indexes: A Prelude to Rising Consumer Price Indexes?

October Empire State Index Fell Unexpectedly

FY 2005 U.S. Budget Deficit Fell Due To Higher Receipts